The Enterprise Investment Scheme (EIS), or Seed EIS (SEIS) for the earliest stage companies, is aimed at high-risk investments and therefore has a number of tax breaks to make it attractive to investors. One of the main reasons to invest is the exemption from capital gains tax that can apply when the shares are sold. With significant exit multiples, particularly in the tech and fast-growth sector, this effective zero per cent rate can represent a valuable saving compared to the standard capital gains tax (CGT) rate of 20 per cent.
There are many tripwires within the EIS/SEIS legislation, particularly around the company’s activities, gross assets, number of employees, and the investors connections to the company. Whilst entirely unintentional, investments can unwittingly fall foul of the detailed rules, resulting in gains being subject to the standard CGT rate of 20 per cent.
External investors who rely on EIS/SEIS relief are unlikely to benefit from Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) so how else could a lower CGT rate be accessed? The little-known Investors’ Relief could help save the day. Whilst statistics show that Investors’ Relief is not widely claimed, with fewer than a thousand taxpayers claiming it in the 2019/20 tax year, it should not be overlooked as a CGT rate of 10 per cent up to a lifetime limit of £10m, is extremely valuable. It could provide up to a maximum of £1 million of tax relief for an individual.
As with all reliefs, various conditions must be met but they are not as onerous as the EIS / SEIS rules. Briefly, Investors’ Relief applies to unlisted ordinary shares that are subscribed for in cash in a trading company or group. The shares must be held for a minimum of three years but the rules around being connected are significantly relaxed. The main condition is that the investor must not be an officer or employee of the company/group.
It may not be quite as valuable as EIS/SEIS relief, but Investors’ Relief can represent a significant saving, and should be considered when reporting gains and paying your tax bill in the coming weeks.